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Manufacturing Index Slightly Down But Not Out

After surging to a two-year high of 63% in its June installment, the quarterly measure of coming business activity issued by the Manufacturers Alliance/MAPI declined slightly to 59% in September. That means that manufacturing output is expected to increase during the final quarter of 2002, albeit at a slower rate than in the third quarter. A measure above the 50% level indicates that the manufacturing sector generally is growing; below 50% indicates that the sector is contracting. "Overall, the manufacturing sector is expanding, but it is not as widespread as it had been," notes Donald A. Norman, the Manufacturers Alliance/MAPI economist who compiles the survey upon which the index is based. The composite index of future business activity shows "the outlook is one of long-term recovery." While the composite index of future business activity dipped slightly, several individual indexes showed improvement over the last quarter, the Arlington, Va.-based business policy group says. For example, the orders index, which compares new orders in the third quarter with the same quarter one year ago, rose from 55% in June to 61% in September, and the export orders index crept up to 54% from 52%. Manufacturers Alliance/MAPI says at least part of the rise in the export orders index is attributable to the decline in the value of the dollar. The Manufacturers Alliance/MAPI survey and resultant indexes reflect the opinions of 50 senior financial executives at member companies. The inventory index fell from 30% in June to 24%, which Manufacturers Alliance/MAPI says indicates a continuing inventory correction. "The continued decline in inventories suggests that firms eventually will be forced to expand production just to rebuild inventories, thereby contributing to a continuing recovery," notes the policy group. Several indexes showed signs of a slowing economy, however. The shipments index, which indicates how prospective shipments in the fourth quarter of 2002 are expected to compare with the same period a year ago, fell slightly -- to 62% from 68% in June. The backlogs order index fell from 60% in June to 50% in September. September's survey results show that just 27% of respondents reported that current backlogs were up, down from 44% in June. Rising backlogs are considered a good sign as they suggest new orders are exceeding shipments. The profit margin index dipped to 45% in September from 46% in June. Interestingly, a higher percentage of survey respondents in September reported that current profit margins were up compared with a year ago than did in June, although a greater percentage in September also reported that profit margins were down. However, there was a big drop in the percentage of respondents who said profit margins were the same. "You really get a feel for the unevenness of the recovery," says Norman. "It's all over the map." Capacity utilization also dipped. The percentage of firms operating at above 85% capacity declined from 22% in June to 20.9% in September. The percentage operating at less than 75% of capacity rose from 30.5% to 41.7%. In other news, the annual orders index, which compares expected orders in 2003 to expectations for 2002, was 74%. "In and of itself, 74% is a bullish outlook," notes Norman. (September was the first time the annual orders index had included 2003 expectations.) September's capital investment index, which compares expected capital spending in 2003 with spending in 2002, was 45% in September. While the figure suggests that capital spending in manufacturing is weak and could decline next year, it is significantly stronger than the 29% investment index of one year ago. Research-and-development spending also is expected to increase in 2003, based on an R&D index of 55% in September.